Chairman of the Australian Energy Market Commission (AEMC), Dr John Tamblyn, today presented a paper to the CEDA Energy Forum which considers whether the nation's energy markets are capable of transitioning to a significantly lower carbon-intensity.

Referring to the AEMC Review of Energy Market Frameworks in Light of Climate Change Policies, Dr Tamblyn said the Commission's over-arching finding is that the market frameworks are broadly resilient to the challenges of reducing greenhouse gas emissions.

The paper titled "The Reform Journey Continues: Energy Markets and Climate Change Policies" refers to the AEMC Review's 1st Interim Report (December 2008) which identifies a small number of key risks where careful consideration of options for change is required.

These relate to:

• Managing reliability in the short term, given prevailing tight supplies in some regions through the early years of this transition;
• Providing regulated networks and generators with the right signals to connect large-scale remote renewables efficiently; and
• Enabling the efficient costs of the CPRS and RET to be reflected in bills to customers - and empowering consumers with the ability to respond.

The detailed reasoning underpinning these over-arching findings is discussed in the CEDA Energy Forum Paper.

Dr Tamblyn said today that these preliminary findings are now open for public consultation and that stakeholder submissions would help test the 1st Interim Report's preliminary findings.

"Stakeholder consultation will inform the next phase of our review to identify and assess potential options for change," he said.

Strengths of the current framework

"The current market framework has proved to be resilient in delivering reliable energy supplies at efficient prices and supporting significant new investment in generation capacity and natural gas supplies. The dominant view among industry stakeholders is that the current frameworks are capable of delivering the required, much larger volumes of new investment implied by the CPRS and expanded RET. There are substantive reasons for this which reflect the underlying robustness of the market design choices made at the start of the market in 1998," Dr Tamblyn said.

"While the introduction of the CPRS and expanded RET will alter the size and form of price and non-price signals and commercial incentives provided under the current energy market frameworks, there is no reason to conclude that the effectiveness of the signals will diminish. Nor is it clear why the ability of market participants to respond to those signals would be diminished by the introduction of the CPRS and RET. There are other wider challenges affecting energy markets, including the global credit crisis and its impact on Australia as an importer of capital. Well designed and functioning energy market frameworks can only contribute positively in dealing with these wider challenges".

"Competitive energy markets continue to provide the most effective means of responding to changing economic and policy circumstances - as long as they are supported by an appropriate framework of rules and regulations.

First Interim Report

"Our 1st Interim Report has concluded that a number of issues raised by our initial scoping paper are not material to the ongoing ability of energy markets to deliver efficient outcomes for consumers in the short and long term. We will use stakeholder submissions on our 1st Interim Report to test these findings.

"The Review is currently focussed on those areas where some changes may be required to ensure the ongoing efficiency, reliability and security of energy supplies after the CPRS and RET are introduced.

"In particular, we found that the proposed CPRS is likely to create risks in relation to the regulation of energy retailing" Dr Tamblyn said.

"Our Report also identifies the possibility of a reserve shortfall in the short term due to the lead time required to build new generation capacity after a period of policy uncertainty. It also concludes that there may be a need to re-examine the current ‘tool kit' available to the system operator to deal with any such capacity shortfall.

"We also believe that the expanded national RET is likely to place substantial stresses on the current market arrangements for new generation connection to transmission networks, and that the RET may potentially lead to additional network congestion on electricity transmission networks," he said.

Next steps

The next stage of the AEMC Review of Energy Market Frameworks in light of Climate Change Policies will assess public submissions on the implications of these issues and make recommendations in June 2009 (Second Interim Report) on potential mitigation measures for the issues that have been identified.

The AEMC will provide its final advice to Ministers in September 2009.

For further information contact:

AEMC Chairman, Dr John Tamblyn 02 8296 7800 or
AEMC Communications Manager, Prue Anderson 02 8296 7800 or 0404 821 935